By Joan Bwalya, Head of Governance, Risk and Compliance
Know Your Customer/Business – Why It Matters!
Ever wondered what all the hype around Know Your Customer/Business (KYC/B) is about?
Why can’t financial institutions and regulated businesses just transact without the hassle of requesting certain documents from their customers? Take reinsurance companies like Klapton Re, why will they not just accept reinsurance risks without asking potential clients to complete KYC questionnaires and share documentation?
Like when we walk into a bank, we trust them with our hard-earned money, but still, they will not open an account without making us fill out forms and attach all sorts of documents. They need customers to function as profitable businesses, right? So why the fuss over these seemingly irritating requirements?
Well, if these thoughts have ever crossed your mind or you are simply curious, read on. I will give you some background, my two cents. (Well, not technically mine because this is history and globally accepted principles, but to keep the vibe of this article flowing, we will call them my two cents.)
A Story of Knowing: the history of KYC/B
In the early days of modern banking, financial institutions were built on personal relationships. A banker often knew their customers by name, face, and family background. Trust was local, and transactions were manual. There was no need for elaborate checks because customers were, quite literally, “known.” (“known”? I raised my eyebrows, hope you did too!)
But as the world became more interconnected and financial systems grew in scale and complexity, that old-world trust began to break down. Money started moving faster and across borders. Along with it came the darker sides of globalization: money laundering, fraud, terrorism financing, and organized crime.
(Something always falls apart. That is why, as a personal principle, I never operate on trust alone and I hope you do not either.)
It was in this context the need to preserve trust in a rapidly changing financial landscape that the concept of Know Your Customer was born.
(Problems always birth opportunities for innovation, remember that next time you hit a roadblock.)
The Rise of KYC: from Crime to Compliance
The roots of KYC trace back to the 1970s, when global law enforcement agencies began to realize that drug cartels and criminal enterprises were exploiting banks to launder illicit funds. In response, the Bank Secrecy Act (BSA) of 1970 was passed in the United States, marking the first major legislative move to require financial institutions to keep records and report suspicious activities.
However, KYC as we know it today started to take shape in the 1980s and 1990s, particularly with the formation of the Financial Action Task Force (FATF) in 1989 by the G7 nations. The FATF was created specifically to combat money laundering and later expanded its mandate to include terrorism financing.
It issued a set of 40 Recommendations, which became the global standard for anti-money laundering (AML) policies and KYC was a foundational piece of that framework.
9/11: A Turning Point
Everything changed after the September 11 attacks in 2001. Investigations revealed that terrorist networks had exploited gaps in financial systems to move money and fund operations. This revelation pushed governments around the world to implement much stricter financial controls.
In the U.S., the USA PATRIOT Act of 2001 made KYC mandatory for all financial institutions. It required banks to implement Customer Identification Programs (CIP) to verify the identity of individuals and entities before establishing business relationships.
At this point, KYC evolved from a best practice to a legal requirement.
The Birth of KYB: Knowing the Business Behind the Customer
As regulations tightened, it became increasingly clear that individual customers were not the only risk. Shell companies, front organizations, and opaque corporate structures were being used to hide beneficial ownership and launder money.
(Ever noticed how you keep discovering more problems or potential problems, from a problem you are trying to sort out? Does it ever end?)
This gave rise to Know Your Business (KYB) the corporate-focused extension of KYC. KYB requires financial institutions to identify the actual people behind a business (i.e., beneficial owners), understand the structure of the business, and assess the legitimacy of its operations.
The 4th and 5th EU Anti-Money Laundering Directives (AMLD) especially after 2016, entrenched KYB further by requiring member states to create beneficial ownership registries, increasing transparency across corporate entities in Europe.
Where are we today? technology, fintech, and the modern Era
Today, KYC and KYB are cornerstones of global financial compliance. But they are no longer manual, paper-heavy processes. With the rise of fintech, regtech, and digital financial operations and business, verification is now powered by AI, biometrics, and blockchain.
Automated systems can validate IDs, scan global databases, and screen against sanctions lists in seconds. But with innovation comes new challenges; cybercrime, synthetic identities, and ever-evolving regulatory expectations (remember what I said about one problem uncovering other problems?)
What began as a principle rooted in trust has now become a complex, dynamic system, a blend of technology, regulation, and risk management, all designed to keep financial systems safe, transparent, and fair.
Looking Back and Forward
Look at what memory lane has uncovered! I am convinced you now appreciate why it matters. Why KYC/B is more than just a checkbox exercise. Why it is a critical tool in curbing financial crimes that are like a cancer spreading across the globe, threatening our financial systems and economic stability.
I also hope you enjoyed my side commentary, a few life lessons in there, if I do say so myself.
Below are a few links to matters discussed in this history and forward-looking lesson, for those who wish to further expand their business acumen.
Bank Secrecy Act (BSA), 1970 (U.S. Treasury summary): https://www.fincen.gov/resources/statutes-regulations/bank-secrecy-act
Financial Action Task Force (FATF) – 40 Recommendations: https://www.fatf-gafi.org/en/publications/fatf-recommendations.html
USA PATRIOT Act, 2001 – Key Provisions (U.S. Treasury): https://home.treasury.gov/policy-issues/financial-sanctions/usa-patriot-act
EU 4th & 5th Anti-Money Laundering Directives: https://finance.ec.europa.eu/anti-money-laundering-and-countering-financing-terrorism/eu-legislation_en
World Bank on KYC/KYB and AML Practices: https://www.worldbank.org/en/topic/financialsector/brief/anti-money-laundering-combating-the-financing-of-terrorism